Which of the following is a characteristic of the 'New Trade Theory' associated with Paul Krugman?
A. Only comparative advantage based on technology differences matters
B. Trade is explained only by differences in factor endowments
C. Economies of scale and product differentiation can explain trade even between similar countries
D. Trade always reduces welfare
Answer: Option C
Solution (By JKSSB Mock Tests)
New Trade Theory emphasises that increasing returns to scale and consumers’ preference for variety can generate trade and gains from trade even between countries with similar factor endowments.
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